Proposition 19 on the Nov. 3 ballot would close one inequity in California’s byzantine property tax laws and create another.
It would eliminate provisions that allow often-wealthy parents to transfer without tax consequences ownership of family homes to their children who use the residences as rental properties.
But it would also expand rules allowing residents age 55 or older to transfer the tax value of their homes when they purchase a new one. The proposed expansion, like a measure voters resoundingly rejected two years ago, would be a windfall for homeowners who already reap the biggest benefits from California’s property tax laws. And it would add to the competition for a short supply of more-affordable smaller homes, squeezing out first-time buyers.
The net effect of the two provisions could eventually increase state and local tax revenues by hundreds of millions of dollars annually, according to the Legislative Analyst’s Office.The local portion would benefit municipal governments and schools. The state portion would mostly be earmarked for fire protection, another example of ballot-box budgeting that hamstrings state lawmakers’ discretion to spend tax money for most-critical services.
The Legislature put Prop. 19 on the ballot at the urging of the real estate industry, which would benefit from more home sales, and the state’s largest firefighter union, which would receive more jobs for its members.
Voters should reject it. Prop. 19 merely plugs one hole in the state’s porous property tax laws while creating another. It’s time for holistic reform that simplifies the system and makes it more equitable. This isn’t it.
Property tax history
To understand the context of Proposition 19, go back to 1978, when voters angry about rising property taxes passed the landmark Proposition 13. The measure limited increases in property values for tax purposes, called the assessed value or tax value, to 2 percent annually even though market values often escalate more rapidly.
When property is sold, the tax value is reset to match the sale price, leading to huge disparities in tax bills. The annual levy for a house purchased three decades ago is just a fraction of an identical one next door purchased three years ago.
Voter-approved changes since 1978 have exacerbated the inequities. Some of those changes would be altered by Proposition 19.
In 1986, voters passed Proposition 58, enabling parents to transfer homes to their children without triggering a reset of the tax value. Thus, the tax value remains artificially low and the disparity is magnified over another generation. It’s a tax break unique to California.
The reassessment exclusion applies even if property is used for rental income. A 2018 investigation by the Los Angeles Times found that 63% of homes inherited under the system in Los Angeles County were second residences or rental properties.
The tax break deprived schools, cities and county government of more than $280 million in tax revenue in 2017. The Times analysis found similar trends in 12 other coastal counties, including some in the Bay Area.
Prop. 19 would eliminate the tax break for inherited homes that aren’t used as the owners’ primary residences. That makes sense. Had Prop. 19 stopped there, it would deserve voter support. Sadly, it doesn’t.
Rerun of failed measure
In 1986, voters also passed Proposition 60, which allowed property owners age 55 and older one chance to purchase a cheaper home in the same county and transfer the tax value of the property they were selling. This most benefits long-time homeowners with low tax values.
The concern was that, because of the oddities of Prop. 13, long-time homeowners seeking to downsize for retirement or when children move out could face higher property taxes when buying a cheaper home.
Counties were later given the option to accept tax-value transfers from other counties. Of California’s 58 counties, only 10 — including Alameda, San Mateo and Santa Clara — allow a buyer to transfer a tax value from another county. At least eight other counties — including Contra Costa, Marin and Monterey — stopped participating because the tax loss was too great.
Two years ago, the real estate industry spent $13 million on an initiative campaign to expand the program statewide and sweeten the deal for eligible homeowners. Sixty percent of voters wisely rejected Proposition 5.
With Prop. 19, the industry is trying again. This time, the measure would:
• Apply the transfer program to moves anywhere in California. Counties could no longer opt out.
• Allow eligible homeowners to transfer the tax value of their homes up to three times. Currently they can do so only once.
• Expand the tax transfer program from the currently allowed moves to cheaper homes to also cover more-expensive ones. Gone is the original premise that the program was for downsizing.
The tax value on a more-expensive home would be the difference between the sale price of the old home and the purchase price of the new one added to the old home’s tax value. So, someone who sold a $600,000 home, with a tax value of $300,000, and bought a new one for $700,000 would have a tax value on the new home of $400,000.
The longer a person had owned their current home, and already benefited from inordinately low tax bills due to Prop. 13, the greater the tax break on the new property. And those who downsize would often be competing with first-time buyers for more-affordable smaller homes.
The real reform would be to abolish the tax-transfer program, not expand it. Vote no on Prop. 19.